Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Thursday, February 21, 2013

In public opinion, economic forecasting has as low regards as weather forecasting. To some extend this is coming from a firmly anchored stereotype, because forecasts for both are actually much better than a mean reverting random walk. And one should factor in that the weather or the economy are very complex animals with a lot of interacting forces (including silly politicians who take nonsensical decisions). But, in a horse race between meteorologists and economists, who would be better at forecasting?

Enter the economist, Matthias Ritter. He uses the price of weather derivatives traded at the Chicago Mercantile Exchange to determine what the market thinks is going to be the future temperature, more precisely the two-week ahead Heating Degree Days and Cooling Degree Days for 6 US cities. And the economic forecast is impressive, it manages to lower the meteorologists' root mean square error by about a quarter. And people say such speculative markets are useless.